 |
John Oharenko |
Chicago, IL – The
Real Estate Capital Institute® (RECI) finds the overall economy
demonstrates strong resilience, with inflation stubbornly hovering in the three
percent range.
John Oharenko, director of The Real Estate
Capital Institute®, advises, “Higher interest rates are here to stay, at least
in the short run. Developers and lenders must find creative ways of
making deals work.
He adds, “…Especially since some CRE property
fundamentals start showing signs of weakness such as multifamily overbuilding and
softening rental pricing trends.”
The Fed thus feels minimal pressure to lower
rates soon. And the bond markets reinforce the trend for higher
rates, with 10-year benchmark treasuries rising about 25 basis points during
the past month.
In such an interest-rate environment,
real estate capital funding sources search wider and deeper for attractive
yields by focusing on the following types of opportunities:
New Construction:
On a selective basis, ground-up construction projects are still in demand,
particularly for underserved multifamily markets. Lenders will
review such ventures as sufficient equity exists (e.g., 35% or more of project
cost).
Banks
and selective debt funds work with seasoned developers, as sponsorship and
liquidity remain key components of construction lending. Except for the
most conservative projects, current pricing for construction loans is commonly
funded at 500 basis points over the SOFR index, translating to over 10%.
Higher risk pricing approaches 12% or more.
Bridge Funding: Besides
construction loans, numerous lending sources seek extra yields by funding
“light bridge” and construction mini-perm takeout opportunities for projects
not stabilized or ready for sale or permanent financing. Pricing starts
in the lower-to-mid teens, based on terms of one to three years.
Alternative Property Types:
Most investors focus on multifamily and industrial ventures for “safe”
returns. Alternatively, some creative capital sources pursue yields by
tackling more challenging property types where less competition exists, such as
office, lodging, and retail deals.
Instead of fully rejecting such opportunities,
these capital providers target entrepreneurial owners with substantial cash
equity (e.g., 50% or more) based on sound business plans.
In return, such investors require overall yields
approaching the mid-teens or more (often higher yields than for construction
loans). Additional fees (e.g., upfront and extension) further boost
yields.
“Mission” Money:
Funding programs offered by lenders with specific social missions remain
favored to a selective group of owners that understand such needs. As
many traditional funding sources stay on the sidelines, mainly
government-sponsored enterprises (“GSE”) continue providing liquidity.
Popular
mission money programs focus on affordable housing. Although limited in
scope, such funding options are extremely attractively priced. For
example, FHA/HUD programs offer 6.5% permanent rates for up to 40-year terms.
The Real Estate Capital Institute® is a
volunteer-based research organization that tracks realty rates data for debt
and equity yields.
CONTACT:
John Oharenko
Executive Director
director@reci.com / www.reci.com
The Real
Estate Capital Institute®
Chicago,
Illinois USA 60622
